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Banks revolt over plan to kill $17B Fed payout

While bankers weren’t looking, a provision was slipped in the Senate’s highway funding bill that would make banks the single largest funding source of that bill. The language proposes to substantially reduce the benefit banks receive from the Federal Reserve to the tune of $17 Billion over the next 10 years.

When banks join the Federal Reserve system, they are required to buy stock in the central bank equal to 6 percent of their assets. However, that stock does not gain value and cannot be traded or sold, so to entice banks to participate, the Fed pays out a 6 percent dividend payment. The Senate proposal says it would slash that “overly generous” payout to 1.5 percent for all banks with more than $1 billion in assets. While the summary language outlining the proposal said that change would only impact “large banks,” industry advocates argued that banks who would most identify as small community shops could easily have assets in excess of that amount.

Although bank lobbyists are now attacking the idea, it may be tough to overcome. Taxing banks to improve the highway system is probably a pretty easy sell.Other than banks losing money, what is the impact of this proposed legislation? Janet Yellen, when asked to comment on the reduction in the dividend thought it could impact banks inclination to join the Fed:

“This is a change that likely would be a significant concern to the many small banks that receive the dividend,” she said.

Overview by Sarah Grotta, Director, Debit Advisory Service at Mercator Advisory Group